June 21, 2023
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It can be pretty intimidating to look at the failure rate of new businesses. While you’ll go into the venture full of hope and optimism, it’s important to remember that failure is very much an option — and to be OK with it. And, of course, to work on minimising the likelihood.
One good way to do this is to look at what causes other businesses to fail. After all, if you knew what spelt the end for other businesses, then you’ll be less likely to fall victim because of the same reasons. There are plenty of things that can put businesses in danger, but the most common is cash flow problems. That can be enough to send only moderately successful businesses - as in, ones that have plenty of customers - to the graveyard.
Managing your cash flow, therefore, should always be a priority. In this post, we’ll look at some tried and tested methods for helping to improve your business cash flow.
You can’t do much with money that’s still sitting in your customer’s bank account. It’s just a fact that people are generally not rushing to pay an invoice when it first lands on their desk. They’ll put it off for as long as possible, since, well, paying invoices is annoying. But if you have too many outstanding invoices, then your bank balance may look a little less healthy than it should be. You can’t force your customers to pay their invoices as soon as they receive them, but you can offer an incentive that increases the likelihood. For instance, could you offer a 5% discount for early payment?
If you work with heavy machinery, then you’ll be especially at risk when it comes to cash flow. After all, those heavy machines are expensive — and when they’re not working, you won’t be able to operate at full capacity, which can further damage your cash flow. It’s normal to feel a little panicked when your machinery breaks down since you’ll be calculating the cost of replacing it. But before you do that, remember that in many cases, machinery can be repaired. It’s much more cost-effective to work with a company that offers hydraulic repair services, rather than buying another hydraulic cylinder. If it turns out that your machinery really can’t be repaired, then take a look at leasing rather than buying, which is much more gentle on the finances.
Your cash flow may be in healthy condition the majority of the time because you’re always in more or less healthy working conditions. But what about when things aren’t quite as good? Lean times can hit all industries, and sometimes it’s not possible to forecast when they’ll arrive. You’ll probably have a sense of when your quiet period of the year is, but when something like the coronavirus pandemic hits? That could spell trouble. When times are good, be sure to put some money away so that you can ride out the leaner periods if and when they arrive. It’s not the most exciting way to use your company’s money, but is it important!
Another option for unpaid invoices is to use invoice factoring. You can encourage your clients to pay early, but even with all the incentives in the world, some will always leave it until the last minute. If you’re worried about your cash flow as a result, then invoice factoring can help. With this, another company will pay you the majority of the value of the unpaid invoice within a few hours. When the client finally pays, the lending company gets the money. You’ll lose a small amount of money in the process, but it can help to keep your business afloat, so it’s always worthwhile keeping the option in your back pocket.
Finally, it may be worthwhile conducting customer credit checks before agreeing to work with them. It’s just a fact that, like people, businesses can have a history of leaving their bills unpaid. And it’s much easier to learn if that’s the case before you agree to work with them. You don’t need to perform customer credit checks for every deal, but if it’s a big one that would be problematic if it was left unpaid, then it’s worth doing — it might just save you big problems further down the line.
And there we have it! Having good cash flow won’t automatically bring success, but it’ll remove one of the pathways to failure.
